If you participate in a qualified retirement plan, such as a 401(k), profit-sharing, or Keogh plan, through your job or self-employment, you might be allowed to borrow from the account. It’s important to note that the borrowing option is not available for traditional IRAs, Roth IRAs, SEPs or SIMPLE-IRAs.

In the right circumstances, taking out a plan loan can be a smart financial move because you gain access (within limits) to your retirement account money without having to pay taxes. One of the plus sides is that when you repay the loan with interest, you’re essentially paying the interest to yourself rather than to some commercial lender. However, the caveat is that you must be prepared to pay back the borrowed money on time or face potentially dire tax consequences.

How much can I borrow? The maximum you can borrow from a qualified retirement plan is generally the lower of $50,000 or half of your vested account balance. Most plan loans are secured exclusively by the borrower’s vested account balance, although that’s not always the case.

What are the drawbacks? There are two big drawbacks:

1. Your account balance may be irreversibly diminished if you don’t pay the loan back. Why you ask? Because the tax law imposes strict limits on how much can be contributed to an account each year. So you won’t necessarily be able to make up amounts by making bigger contributions later on.

2. You face harsh tax consequences if you fail to pay back the loan according to its terms. Specifically, if you don’t repay it on time, the IRS considers you to have received a taxable distribution equal to the unpaid balance. That triggers a federal income tax liability and possibly a state income tax bill. To add insult to injury, if you’re under age 59 1/2, you may also get slammed with a 10 percent penalty tax.

Can I deduct the interest? It depends. With some exceptions, which we’ll explain later, the standard federal income tax rules for interest expense paid by individual taxpayers also apply to interest paid on a qualified retirement plan loan. Under these rules, your ability to deduct (or not deduct) the interest depends on how you use the borrowed money. You must trace where the loan proceeds go, in other words. Once the borrowed cash has been traced to a personal, business or investment expenditure, the related interest expense is classified accordingly. Here are the deductibility rules:

• If you inject the borrowed money into a pass-through entity business, such as an S corporation, partnership or LLC, and you are active in the business, you can generally deduct the related interest as a business expense.

• If you invest the borrowed money, you can deduct the related interest to the extent of your investment income (from interest, short-term capital gains and certain royalties).

• You cannot deduct personal interest unless you spend the borrowed money to acquire or improve your main or second residence or you spend it on qualified higher education expenses. However, in the case of interest on retirement plan loans used for educational expenses, the deduction is not available.

These are the general rules and they are reasonably favorable.

Are there exceptions to these general rules for deducting interest? Yes, and unfortunately, they are not so favorable. Specifically, you usually can’t deduct interest on a 401(k) or 403(b) plan loan if any of the account balance used to secure the loan comes from elective deferrals.

For example, let’s say your plan loan is secured by your 401(k) or 403(b) account balance. You can’t deduct any of the interest if any of that balance is from your elective deferrals. It doesn’t matter how you use the loan proceeds, or if there’s other security or collateral for your plan loan, such as your home. The fact is almost every 401(k) or 403(b) account balance includes at least some dollars from elective deferrals. Therefore, interest on loans from these types of plans is rarely deductible.

However, you may be the exception. Your 401(k) or 403(b) account balance might have been funded exclusively by employer contributions and related earnings. Or your plan loan might be secured exclusively by the portion of your account balance attributable to employer contributions and related earnings and by another asset, such as your home. If you’re in one of these rare categories, you can follow the general interest expense rules explained above, which means you might be entitled to a deduction for the interest on your 401(k) or 403(b) plan loan.

What about interest on other plan loans, such as a defined benefit plan? Is it deductible? The chances are better that it is, such as if you pay interest on a loan from a qualified retirement plan that’s not a 401(k) or 403(b) plan, such as a defined benefit pension plan or a garden-variety company profit-sharing plan. In many cases, the general interest expense rules for individual taxpayers explained above apply to you. Under those rules, you may or may not be able to deduct the interest, depending on how you spent the borrowed money.

The exception is that you cannot deduct any interest on a plan loan if you are a key employee of the employer that sponsors the retirement plan in question.

How do I know if I’m a key employee? You are a key employee if any of the following three descriptions fit:

• You’re an officer of the employer and receive annual compensation above $170,000 in 2016 (unchanged from 2015).

• You own more than one percent of the company and receive annual compensation of $170,000 for 2016 (and 2015). Once again, you must count your direct ownership percentage, plus indirect ownership under complicated attribution rules.

• You own more than five percent of the company that employs you. You must count both your direct ownership percentage, plus indirect ownership under the so-called attribution rules, which are complicated.

To summarize, these rules can be tricky, and you’ll want to consult with your tax advisor if you have questions or need more information. Again, if you borrow from your 401(k) or 403(b) plan, the resulting interest expense is very likely to be nondeductible, but not always. You could be one of the lucky few. Interest on loans from other types of plans may or may not be deductible under the general rules for interest expense paid by an individual, unless you’re an owner or high-powered employee (as defined by the tax law), in which case you can’t deduct any of your interest.